‘We May Be In The Midst Of A Hard Landing’: California
A pair of reports on the California housing bubble. “Southern California’s housing boom is running out of steam, but the slowing pace of sales won’t erode the huge gains in equity that many homeowners have realized in recent years, says a report by Harvard University.”
“Not all economists share the report’s optimism. In recent months, some analysts have warned that price drops are possible as inventories of for-sale homes grow in Southern California. Economist Mark Schniepp of the California Economic Forecast said yesterday that those who embrace the ’soft landing’ scenario may be engaging in wishful thinking.”
“‘It has become a popular notion simply because people really want it to happen,’ Schniepp said. ‘We know that happy endings don’t always happen. We may be in the midst of a hard landing. . . . Interest rates are rising, and relatively sharply since March.’”
“Economist Zoltan Pozsar holds that the lack of affordable housing and the broad use of adjustable-rate mortgages make California’s pricey housing markets vulnerable to corrections. California ‘is at the highest risk of seeing downward pressure in home prices,’ Pozsar said. ‘You are more exposed because housing is most unaffordable in California of all states. Home prices have been in a much sharper run-up than elsewhere, but median incomes have not kept pace.’”
“In April, San Diego County’s housing prices slipped in some areas. The overall median sales price was $505,000, down from the peak of $518,000 in November. The year-over-year increase was 4.3 percent from a year ago. Overall sales were down nearly 31 percent from April 2005 to 3,705 transactions.”
“Harvard’s housing center attributed continued price gains around the country to the lending industry’s development of adjustable loans that enable people to buy costlier homes. The report was optimistic about the ability of home buyers to handle adjustable loans. For most homeowners, increased mortgage payments are still several years off. Homeowners generally have ’sizable equity stakes to protect them from selling at a loss, even if they find themselves unable to make their mortgage payments,’ the report said.”
The Valley Voice. “The Tulare County Association of Realtors reports as of June 1 the inventory of existing homes for sale reached 1690, up from 1541 in early May of 2006. These numbers compare to just under 400 homes for sale this time last year.”
“A second more detailed report done by Icenhower Real Estate of Visalia focuses on both new home builders in the Visalia area as well as the market conditions for existing homes. ‘We needed to get a handle on what was going on,’ says Brian Icenhower who worked on the report.”
“‘We found there is an excess of 70 subdivisions being marketed in the Visalia area alone,’ says Icenhower and the competition in new homes and volume of product ‘has driven down prices for both new houses and existing homes.’”
“The pace of building has not let up in Visalia, the city reports, with an expected 1400 to 1550 new homes likely to built this year.”
“The Icenhower report details that of the 845 existing homes for sale in Visalia, 283 or one third of them are vacant. Icenhower says that’s due largely to the fact so many homes in recent years were purchased by investors.”
“The report details what new home builders are marketing in their Visalia subdivisions with most now offering a 3% commission (some go to 4% commission) as well as incentives that range from $2,000 to $20,000.”
“MLS figures for June show pending sales are about 50% of what they were last June signaling slower sales even as the home selection grows for both new and existing homes.”
“Icenhower says the ‘the numbers kind of shocked me’ especially when you add in the amount of residential land and lots already available in the city.”
“‘It has become a popular notion simply because people really want it to happen,’ Schniepp said. ‘We know that happy endings don’t always happen. We may be in the midst of a hard landing. . . . Interest rates are rising, and relatively sharply since March.’”
“Economist Zoltan Pozsar holds that the lack of affordable housing and the broad use of adjustable-rate mortgages make California’s pricey housing markets vulnerable to corrections. California ‘is at the highest risk of seeing downward pressure in home prices,’ Pozsar said. ‘You are more exposed because housing is most unaffordable in California of all states. Home prices have been in a much sharper run-up than elsewhere, but median incomes have not kept pace.’”
I am happy to see that all economists are not either paid shills or highly-educated dunces…
I’m convinced there is some kind of crisis in contemporary sciences, from physics to economics. Just like there are fancy string theorists, who never touched a real particle accelerator, instead bathing in the sea of purely made-up math, there are all these fancy economists, who never looked out the office window and never did a reliable survey, instead lazily relying on aggregate government and industry surveys, like GDP, per-capita income, and so on.
As the result, you can’t expect them to hold views even slightly tangible to reality.
Think of it this way - after there’s the inevitable crash there will be a flurry of academic activity by armchair economists trying to explain why their theories failed.
“…armchair economists trying to explain why their theories failed.”
Similar to Ben’s observation below, many, if not most, of these people will then will try to re-write history by claiming that what happend was what they predicted all along. The wonderful thing about the Internet is that a lot of us save these original quotes for posterity and search engines can dredge them from archives.
Personally, the only “economists” that have denied the bubble have either been:
1. Paid directly by the Real Estate Industry or
2. Trying to soothe themselves to sleep at night for a bad personal decision (those so-called economists in Pomona come to mind)
Any serious economist has been worried since at least 2004. People can call themselves all kinds of things, but it doesn’t make it so.
If housing economists from Harvard for christssakes are not serious, then I don’t know who the serious ones are.
Not disagreeing with you on this one, but it is the oldest trick in the book for economists. The report includes the boilerplate ceteris paribus comments.
Take for example this statement:
Based on the standard data we are looking at (which is outdated and outmoded when you’re looking at a speculative mania as normal market movements) there is no indication that price declines are in the near future.
Then, for giggles and grins, remove the comments in the parentheses. Seems like a very different comment.
Max, check out the Policy Advisory Board for the Joint Center. They may be serious, but toward what end.
http://www.jchs.harvard.edu/people/pabmemberlist.html
Well I think you are a little harsh on the string theorists. Time and time again unexpected deep relationships have been discovered between pure mathematics and physics. The scientific method does work, and eventually these hypotheses will become accepted theories - or they will be falsified.
But as for the economists, well economics isn’t a science. It does not yield reliable predictions, although there are some interesting and counter-intuitive observations, like comparative advantage. Many economic doctrines, such as monetarism, are deeply flawed. Alfred Nobel forbade there ever being a Nobel Prize in economics for good and proper reason (and there isn’t today - although there is a Bank of Sweden prize awarded by the Nobel committee). It is well-known that anything that a number of economists agree on is almost certain to be wrong.
libertas,
a lot of physisists are critical of the string theory. Due to its very generous math, it “predicts” dozens of quantum colors (instead of the known three), dozens of dimensions, and supersymmetries not yet observed. Most of string theories are what they are - exercises in mathematics, based on a dubious assumption that it is possible to reconcile general relativity (smooth geometric interpretation of gravity) and quantum mechanics (discrete, group-based description of exchange that unfortunately lacks gravity). Many string theorists never worked with real particle accelerators, never did any hands-on work for that matter. They only speak in tongues only they can comprehend, and sometimes, even they don’t understand just what the hell they are talking about. Since even a basic string theory (there are many of them too) “predicts” hundreds of universes, string theorists sweat to explain how come we observe only one, which leads to some bizzare occult-like explanations like the Anthropic Argument. Read about it, it’s a good laugh material.
Back to economics - I am convinced that economics is science, because I don’t see any reasons why we can’t apply scientific method to study our own behaviour. The fact that it is not exact is immaterial, since the same applies to physics as well, as well as practically any natural science. The real danger is that since economic knowledge can give us so much power, there are those who act out of ulterior motives and dilute honest discourse with BS. (I agree on monetarism, and actually, any “ism” in economics).
The real danger is when noneconomists presume they know what economics is.
“Back to economics - I am convinced that economics is science, because I don’t see any reasons why we can’t apply scientific method to study our own behaviour.”
Max, this is called psychology. It is generally cosidered its own science. Econ, while I’m not bashing its study, is mostly observational. Looking for patterns. Controlled experiments in mass markets are kind of hard to do. We’re talking CONTROLLED here. That usually falls under the psych dept.
As to string theory, it sounds like you had your mind made up well before you picked up your book. Unless, of course, it was a book bashing the theory. I am not, mind you, claiming to know squat about it one way or another - just noting the slant of your comments. In fact, most of what you wrote above sounds like it came straight from a book.
Laughing at a theory doesn’t make it wrong (or right, for that matter) - it only shows a little something about the person doing the laughing. The whole point of what’s going on is simply this: if you can’t prove these folks wrong, then you cannot summarily claim to be right (even though you may very well be!).
You’re right about real estate theory and string theory. This was the source of contention between me and many a fellow grad student during my college years. Funny how the center of both nonsense fields seems to be CA. The internet bubble originated there, too. What are they putting in the water on the west coast?
Economists are well paid prostitutes. Tell me who hired the economist and I will tell you what he will say. Regrettably a lot of economists work either for governments and politicians or banks.
True. But it is mostly a spiritual and moral crisis. Lack of values in life leads to lack of values in all fields of human experience.
There is disconnect between the real economy, the concrete world and the virtual and fantansy world that finance is today.
What’s really disgusting and revolting is that it is the fantansy world of finance dictates the real world. These people in finance should be put in their place by the real world. They were supposed to be only the facilitators and intermediaries.
Fundementally these paper shufflers have taken over the real world and imposed their ficticious models upon our heads.
In the middle ages kings regularly would cut the heads of certain bankers. Now it is the bankers that cut the heads of ordinary people.
Zoltan Pozsar! That is the 2nd greatest name ever, 2nd only to Cosmo Cramer….
We’ve had a rather stunning development in Sacramento. Pending sales have dropped by 33% in 3 weeks. We’re looking at almost a 10 month supply right now. Where have all the buyers gone?
http://sacrealstats.blogspot.com/
With apologies to Pete Seeger;
Where have all the buyers gone?
Long time passing
Where have all the buyers gone?
Long time ago
Where have all the buyers gone?
Prices too high every one
Oh when will we ever learn?
When will weeee ever learn?
etc.
The cycle is about 70 years. Most who lived 1929 and the dirty 30’s are dead today. So it’s about time maybe for a new depression.
The depression in the 30’s did not start on the stock market. In reality it started in Florida with swamp land swindles.
It smells a lot like that in Florida in 2006.
No doubt about it, we will have to wait for Californians to realize that it’s going to be a very hard landing for sellers.
The California house prices have been totally outrageous and out of control compared to wages and economy. Prices need to come way down before homes will start moving. Sellers may want to continue holding on to their “paper valued” homes, but they’re not going to be selling. Buyers are patient and wise and will wait for the price drops. Once the California real estate stalls long enough, prices will come down …. they will drop as they did in the 90’s housing bubble. Hang on and be patient and you will get the chance to buy one great house at a very good value — I did — got a $400,000 townhouse for $250.000 in 1996.
California’s housing boom is running out of steam, but the slowing pace of sales won’t erode the huge gains in equity that many homeowners have realized in recent years, says a report by Harvard University
I remember asking it before, but still - why are economists such dumbfvcks? The higher the title, the dumber the opinion. Isn’t economics supposed to be science?
From todays article:
‘The economy does not look poised for a nose dive,’ said Nicolas Retsinas, director of Harvard’s Joint Center for Housing Studies. ‘A soft landing is in the offing, not dramatic price declines.’
The other day:
‘We are at a turning point in the housing market,’ said Nicolas Retsinas at Harvard. ‘But this does not mean that we are going to take a nose dive, except in selected areas of overbuilding and highly inflated valuations.’
“except in selected areas of overbuilding and highly inflated valuations.”
As in the entire states of California and Florida!
Allow a dummy to contradict themselves…. in 2002 he said RE is shoring up the market, has something changed? If RE goes, I guess “something” else will come along.
Suzanne researched this.
“NICOLAS RETSINAS, Harvard University: It really is truly remarkable. We study these kinds of economies over the long term, and this one is truly different. In the past, we almost used the housing sector to determine whether a recession was coming, but this time it really is different. The housing sector, indeed, is shoring up the economy. It seems that people are still buying homes; they’re still building homes, despite this bad news.”
Taken from (with lovefest between Lereah and Retsinas):
http://www.pbs.org/newshour/bb/business/jan-june02/housing_5-28.html
Actually, everyone, read the entire article a the link… there’s some priceless stuff in there…
Actually, everyone, read the entire article at the link… there’s some priceless stuff in there…
Scary stuff. As in, “last year, housing made up for 61% of GDP growth”. If that’s true, doesn’t that bode horribly for the entire economy.
This quote really burned me up: “Well, right now, lenders, realtors, home builders, Fannie Mae, Freddie Mac, all the different real estate-related organizations are trying hard to bring everyone into the home-buying process. ” As if this was some kind of egalitarian process. Clearly, the only reason they wanted to bring these poor, soon-to-be BK fools into the process was in order to line their own pockets.
>are trying hard to bring everyone into the home-buying process
Hey, wait a minute, that sounds like a classic pyramid scheme…oh, wait, it *is* a classic pyramid scheme.
God bless you Ben Jones. I seriously don’t know what we’d do without your encyclopedic arsenal of housing information and contradictory gems like this. You da man…. We all owe you an alcoholic beverage of your choice when this housing mess comes to it’s fruition….
Please keep it up Mr. Jones.
No, economics is not a science. That is why the Nobel Prize is not awarded for economics.
???
Is that sarcasm, because, well… there is one for Econ
Years ago I worked on a research project for Dr. Robert Fogel related to his work on economics and aging; determining the potential age for humans in 100 years.
Actually there is not, it is the “The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel “, the funding for this prize is not part of the original Nobel gift. People call it the Nobel Prize in Econ but it is not.
A
Puhlease!
Sorry, but I have to call you on this one. Just because it was instituted in 1968 and not in 1901 like the other prizes does not make it any less a “Nobel Prize”. From their own website, under the list of 2005 “Nobel Prizes”, Economics is on the list. They get a medal, a diploma, and a prize just like all others, and are referred to as a “Nobel Laureate”.
Just ‘cuz you can get a Nobel prize for it don’t make it science. Literature and peace are certainly not sciences.
P.S. In order of presentation on the Nobel website, Economic Sciences is placed below peace and literature. Perhaps this refers to its relative proximity to science.
Who was it who said, “Economics is the art of predicting the past”
Economics was once known as political economy. It has more in common with sports announcing.
Economists only make predictions; they have no ability to actually guarantee their predicted outcome with a degree of certainty approaching 100%.
They are attempting to forecast the collective behavior of humans. Even those considered good ones (like Thornberg) admit they seem to always get the timing wrong on even the most massive events.
This is because they are not making scientific predictions or forecasts; they are attempting to make mass psychological predictions.
The do give Nobel Prize for economics - see http://en.wikipedia.org/wiki/Nobel_prize
They don’t give it for mathematics, presumably because Nobel had personal reasons against some mathematician.
Read the page that you link to
“Also known as the Bank of Sweden Prize in Economic Sciences in
Memory of Alfred Nobel, and sometimes referred to as the Nobel Prize in Economics, this award was not a part of Nobel’s will. It was instituted in 1969 by Sveriges Riksbank, the Bank of Sweden. Although it is awarded with the official Nobel prizes, it is not paid for by his money, and is technically not a Nobel Prize.”
not a Nobel prize but often refered to as one.
Andrew
No they don’t, This is from the wiki article you linked to:
Nobel Memorial Prize in Economics
Also known as the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel, and sometimes referred to as the Nobel Prize in Economics, this award was not a part of Nobel’s will. It was instituted in 1969 by Sveriges Riksbank, the Bank of Sweden. Although it is awarded with the official Nobel prizes, it is not paid for by his money, and is technically not a Nobel Prize.
Yes there is a Nobel Prize for Economics. But it is not a science just a social science. That is why they call it the ‘dismal science.’ However, if you really look at it, Capitalism is based on perpetuating the fraud that some people can ‘divine’ the choices made by millions of people. It is a fraud also because it is based on witholding truth–the truth of the ‘true cost.’ So our social system is based on this fundamental fraud. What can you expect, then, other than ‘fraud’ from a ’sceince’ based on studying such a social system?
IF your statement “Capitalism is based on perpetuating the fraud…” is true then what else is there? Are you implying that Capitalism is an unsustainable fraud and that some form of socialism administered by the “enlightened” few is the answer? Who defines what the “true cost” is? You? I thought that the various failed socialist economies and societies around the world put this relic to bed years ago. If not, then our current administration’s attitude of the elightened few or should I say the enriched few determining what’s best for the rest of us would debunk it. Capitalism and private property are neccessary for a Democracy or Republic to function. They help enormously in decentralizing the money and power of society. Concentrating money in power in a society, no matter how noble the aims, always leads to tyranny. Socialism concentrates the money and power in society by definition, thus it always leads to tyrrany. If your motivation in railing against capitalism is that a centrally planned ecnomy, set-up and administered by people like yourself, could run society in a more equitable and fair way then please, please wander back over to Kosland.
azSun,
you are mixing capitalism (an economic system) and democracy (a political system). There are plenty of dictatorial capitalist countries (Chile in the 70’s and 80’s, Filippines), and plenty of democratic socialist countries (Sweden, Norway).
Capitalism does not protect from concentration of political power. Democracy does. Goals of capitalism are completely different - maximization of return on capital investments, and do not require people’s rule.
I’m aware of the distinction - my point was that a democracy (a political system) cannot survive long without capitalism and private property (an economic system). The democratic countries that have embraced a type of socialism still have private property and don’t have centrally planned economies. All democratic socialist countries have either become more capitalistic and free (England, post WWII Germany, India) or become more socialistic and tyrannical (Soviet Union, Weimar Germany, Iran). Democracies don’t survive long in practice when wealth and power are concentrated. Socialism, by definition, concentrates power and wealth while capitalism, so long as does not go unchecked, tends to spread power and wealth out by allowing more people to participate in the economic process.
I aboslutely agree with your idea that Capitalism does not protect from concentration of political power while democracy does. Socialism however circumventes this by concentrating power and wealth in the government. That concentration of power, if not reversed, eventually erodes the political structure (democracy) and results in tyranny.
My rebuttal to Ted’s comments are aimed at the school of thought that has taken root in parts of acadamia that profit motive (i.e. - capitalism) and social justice are mutally exclusive. This same school of thought also seems to be very skeptical of the public’s ability to choose social justice (either they are not enlightened enough or the capitalists have corrupted the system) so they want to circumvent the democratic process and impose their views on society via the courts or mandate. In the end it starts to look more and more like Stalinism and communism.
As history has repeatedly shown, if power and wealth are concentrated, what is socially just for those in power becomes tyranny for everyone else. Ask those outside of the power structure in facist Germany of communist Russia what that is like.
When people put forth noble ideas but want to concentrate power and wealth to implement those ideas, something bad always follows. We refer to the ‘balance of power’ in our country for a reason. I personally believe that it is currently a little unbalanced but I’ll take that over the alternatives anyday.
Capitalism and social justice can mutually co-exist and are actually far more likely to exist together than seperately.
azSun,
put it this way I agree with pretty much everything you say.
Max,
Please don’t assume that every critic of capitalism pointing out its excesses or shortcomings is a communist. I am not all against private property or individual freedoms. I can hardly stand any dictators or concentration of power.
But why is that while real scientists rarely disagree in their work, the so-called ‘economists’ and political ’scientists’ are always in disagreement on many, many issues?
Because these are not real sciences where reason and proof are elastic concepts? And what good are all these economists who are supposed to ‘forecast’ something today and then come up tomorrow with an entirely different forecast? Why should they even have a job? Have you seen accounts of fraud in Wall Street?
If you look around the ’salesmen’ in our society who entice us with a lot of sweet talk that turns out to be fraud, if you look at the Enrons, the Fannie Maes, the scandals in congress, you will understand the ‘hollow’ core of capitalism.
All these issues will need a lengthy discussion for which this is not the right forum; nor do I have the time now.
On another note, I don’t think the giant housing bubble can have a soft landing. In the Wash, DC area prices declined from 1990 to 1997, in some cases by as much as 25–30%, but realtors keep telling us the lie that prices had only gone flat and never gone down in this area. Maybe they are looking at some graphs that show statistics over the whole area. That is misleading. Continued price rise in a few high-end areas for the very rich could have masked steep price declines in many other areas.
If you look around the ’salesmen’ in our society who entice us with a lot of sweet talk that turns out to be fraud, if you look at the Enrons, the Fannie Maes, the scandals in congress, you will understand the ‘hollow’ core of capitalism.
Most of these can be solved be ‘caveat emptor’.
The thieves of Enron, Fannie Mae, and the housing bubble all played on greed and unwillingness to do due dilligence. That doesn’t mean I believe in a wild wild west of capitalism, but the slimy salesmen aren’t the only ones to blame.
Do you have an I/O ARM loan? Why not?
The sheep will patiently line up to be sheared, if not bringing their dollars, then their votes.
Invest accordingly.
Funny that — there are two Nobel Prize winners on the UCSD faculty. Or is that just an urban legend?
The third tier university(according to US News and World Report) that awarded me a degree in economics has two Nobel Laureates in their Econ Dept. At least that’s what they like to crow about.
Why on earth are you assuming these people are economists?
Here’s Nicolas Retzinas profile: http://ksgfaculty.harvard.edu/nicolas_retsinas
He’s the head of the ‘Joint Center for ,Housing studies, for heaven sakes… Any guesses about who most likely funds that?
And he has a Masters in city planning.
The question to ask is not why are economists such dumb… but are the mainstream media incapable of using Google do they have an ulterior motive for mischaracterizing their sources this way?
Just a Master’s ususally an appointment like that takes a terminal degree. Ususally Phd, sometimes others.
He is talking about my parents who bought 20 years ago, not the speculator who bought last year. The majority of California owners bought more than 5 years ago and do have plenty of equity.
“Harvard’s housing center attributed continued price gains around the country to the lending industry’s development of adjustable loans that enable people to buy costlier homes. The report was optimistic about the ability of home buyers to handle adjustable loans. For most homeowners, increased mortgage payments are still several years off. Homeowners generally have ’sizable equity stakes to protect them from selling at a loss, even if they find themselves unable to make their mortgage payments,’ the report said.”
Oh really? Does this statement apply to San Deigans who cashed out all their equity to buy boats and beamers, too? Or the ones who used their home equity as collateral or maybe to cover closing costs on a Phoenix investment property? Or the ones who went on expensive vacations, or who filled up their garages with junk from China, all paid for out of the home-equity ATM? We won’t really know how many homeowners have sizable equity stakes until we get reliable information on how many households unwisely spent all their home equity gains.
Or simply those plentiful, who live from paycheck to paycheck.
Oh really? Does this statement apply to San Deigans who cashed out all their equity to buy boats and beamers, too? Or the ones who used their home equity as collateral or maybe to cover closing costs on a Phoenix investment property? Or the ones who went on expensive vacations, or who filled up their garages with junk from China, all paid for out of the home-equity ATM?
Of course not. It only applies to those who bought with no money down!
Your left out their buying entire Boise subdivision blocks with $2-3 million
‘Harvard’s housing center attributed continued price gains around the country to the lending industry’s development of adjustable loans that enable people to buy costlier homes.’
The option ARM’s will save the housing bubble!
Their report also misses the more fundamental issue - it’s not the lending industry per se, but the global economy financing the US. Nobody would have been able to do that if not for the unprecedented interest-rate arbitrage opportunities of the past years.
Wait a second . Harvard study is saying in essence that the market is OK because ARM’s won’t adjust for a couple of years and price gains will save the day .( In other words, people will be able to sell before they default because they have equity gains ) . At lease that’s my take on what Harvard Study /Nicolas Retsinas is saying .Somebody correct me if I’m wrong .
Again ,the Harvard study assumes that real estate always goes up and will be up in 2 years when these ARM notes adjust .
First, real estate should be a long term investment and a borrower should not be put on any loan that the borrower cannot afford based on a bail out of a sale . What if the interest rates are at 9 % in 2 years ? What if the homes go down 25% in value instead of going up 25 % in value ?
Loans should be made based on long term affordability of the borrower and a notion that real estate could go down . Why do you think old time lenders wanted that 20% down .
The last 5 year lending practices are going to go down in history as just as stupid as the 1929 buying on margin was in the stock market .
Why is it so tough for economists or other “experts” to say “you know what? Prices are going to fall.” It’s like they can’t bring themselves to say the words. An asteroid could be on a collision course with California, damaging enough to wipe out the whole state and prompting mass evacuations, and I guarantee you’d have an economist out there saying “Yep, nothing to worry about. Your house price is just going to level out even if 100% of the state’s population is fleeing for the Midwest!”
Surging supply + Rapidly declining demand = lower prices. Game. Set. Match.
Because all of the same factors that are causing prices to fall now have existed for the past three years, and prices have skyrocketed. So anyone using fundamental, i.e. economic, analysis that had the cajones to make such a prediction back then got beaten so badly that they won’t open their mouths now. In a mania, fundamental analysis is useless, as the market is driven by psychological factors. And just as fundamentals did not matter on the way up, they will not matter on the way down.
“Because all of the same factors that are causing prices to fall now have existed for the past three years, and prices have skyrocketed.”
Not so. The inventory crash started some time in early 2004 in most markets formerly known as frothy, and has only recently become too big of an elephant to hide under the living room rug.
A fundamental factors that will certainly matter on the way down are
1) rising interest rates (the Fed has hinted more rate hikes are on the way);
2) a deepening flood of inventory of new and used homes;
3) tightening lending standards;
4) increasing buyer precaution as rumors of a housing bubble are confirmed by many of the same media commentators who denied the bubble’s existence as recently as last year;
5) migration of real estate investors from the demand side of the market to the supply side of the market as they learn the hard way that real estate does not go up forever;
6) a race to build as builders make a last deperate attempt to clear out land inventories before they are left holding the bag;
7) amortization resets on ARMS at higher interest rates which force I/O ARMS buyers to walk away and leave the keys when they can no longer afford their monthly payments;
All of the above are leading to a very big fundamentally-based disequilibrium disconnect in local markets formerly known as frothy, where buyers are disappearing while sellers are coming out of the woodwork. The longer this trend continues, the more obvious it will become that a crash is underway, which will make the crash get worse as buyers become more precautious and sellers become more panicked.
Of course, anything which cannot go up forever will stop, including steadily growing inventory of vacant houses, and the way this eventually ends is through equilibrium adjustment, where the sellers who have to sell (due to job loss, divorce, inability to make the jump to a higher monthly payment after a recent, inability to sustain further burn on their cash-flow-negative real estate investment, or the ability to sell for less than their neighbors due to accumulated equity) lower their price to a point where they can attract a buyer. That starts the adjustment down to a new, lower equilibrium price where the number of homes entering the market matches the number selling, as fewer sellers will be forthcoming and more buyers will be forthcoming at a lower price. Of course, the market first has to overshoot on the low side, to compensate buyers in a crashing market for the risk of catching a falling knife.
Well said Getstucco .
Are you all doing something to protect yourselves from the ripple effects of this impending real estate collapse? Just curious. I buy value stocks, international stock funds, muni bonds, series I savings bonds, CDs, gold bullion, and silver bullion.
a litle more than 3 weeks ago total was 800K now it’s 831,334 to put those numbers in perspective if each home for sale was 7500 square feet total area of homes for sale were all placed next to each other area would be larger than square feet of Alaska, texas, rhode island and california unless I made a mistake in my calculations.
http://www.ziprealty.com/maps/index.jsp?usage=search&cKey=74rbwvlk
I dunno, Stanley. Friday Happy Hour might be starting early.
One square mile is 27,878,400 square feet. There are a whole bunch of square miles in Alaska, Texas and California (we don’t need Rhode Island for this). I think your numbers might be a little off, not to mention the average home size is a tad less than 7,500 sq. ft. Drive home safely!
Correction: Don’t drive. Get a lift from a buddy.
I think the 7500 that he was refering to was the lot size. So by his estimate the homes for sale would take up 223 square miles.
Haven’t had my first one yet, so fiddled with the calculator. I think that all of your homes, even at 7,500 sq.ft., side-by-side would fit within 224 square miles. I suspect there are some Texas counties that are a lot bigger than that. So … are you from Rhode Island?
I remember reading once that every person in the US could have an acre of land and we would all fit nicely in Indiana.
MjM
Punctuation is totally over rated
OK, try this one:
A woman, without her man, is nothing.
A woman: without her, man is nothing.
Guess you’re not much into writing contracts.
I was sarcastically referring to stanleyjohnsons lack of punctuation.
Got it — you are right and I was wrong. Focused so much on his erroneous math that I overlooked the complete lack of punctuation in his post. I think he was sincere, though — just math challenged or into the sauce.
I was sarcastically referring to stanleyjohnsons lack of punctuation.
From Cliff Robertson’s Oscar award-winning performance in 1968’s “Charly”, based on Daniel Keyes “Flowers for Algernon”.
Charley, who was mentally retarded, was operated on to supercharge his brain. As his mental performance accelerated, he challenged his teacher to punctuate these words so they would make sense:
that which is is that which is not is not
The correct solution is:
That which is, is. That which is not, is not.
Or as all Editors know: Punctuation is fun!
Sorry, I will make sure to use correct punctuation in the future.
Help, Ben!
Help Ben!
Help! Ben! (As in, Ben is chasing after me with a knife.)
Here is Harvard’s JCHS website.
http://www.jchs.harvard.edu/resources/index.html
There isn’t a direct mention of where they do their fundraising for the state of housing report.
But the last 2 specific studies were bought and paid for by the RE industrial complex.
One was how builders tightened up their supply chains and haven’t been overbuilding funded by Masco, a construction supply outfit.
The other was about 1 year ago and was thoroughly debunked here and elsewhere in the media including other academics calling the study into question. I believe FNMA was the primary funder of that study.
JCHS is firmly in the bubble apologist camp.
Normally I comment on the Idaho Market, but I grew up around Central Cali and graduated from Hanford High School near Visalia/ Fresno in ‘91
What the heck has changed in the area to justify the construction and higher prices? The area is not all that nice: smog, crime, hot summers, foggy winters, etc. When I graduated high school, it was a blessing if you could get out of the area as wages were crappy and teh future looked grim. I could not imagine paying 300-400k in that hell-hole of a valley.
“The Icenhower report details that of the 845 existing homes for sale in Visalia, 283 or one third of them are vacant. Icenhower says that’s due largely to the fact so many homes in recent years were purchased by investors.”
Visalia is truly the armpit of California….these “investors” buying there at those prices is truly a shocker! 1/3 vacant…you couldn’t pay me to live there…this is going to end very badly. There is no justification…only flippers.
“What the heck has changed in the area to justify the construction and higher prices?”
Zero. I have friends and family who live there. Tulare County is just one of the first stops that the equity locusts and builders made on their seemingly national tour. Wages are still crappy and the air quality is even worse than when you left the Valley. Recently, builders were paying $110K an acre for farmland, and flippers were proclaiming until last year that they had found a low priced paradise. Developers have brought in more retail chain stores in response to the housing ATM spending going on, with the usual low wage hourly jobs.
Unlike the last RE turndown where people left the coastal areas in droves for other states, this time LA, SF and the coastal areas flooded equity into the Valley before moving on. A friend of a friend works for one of the big national builders in the area and keeps track of the demographics of those who are buying into the area and where they are coming from. It’s mostly LA, some SF, and a minority are actual locals. Somehow, this information is actually surprising to them from what I am hearing.
It’s going to be a mess. 30% of the homes for sale are unoccupied and we haven’t even started to see things come apart there yet. $400K would have bought a custom built mansion 10 years ago, but now you’re looking at a 3 bedroom nothing great about it house in Visalia on a small lot.
I have a sister and nephew and niece still in Fresno. They are the last of my relatives in the Valley. A longtime older family friend has been commenting on the Valley market the last 3 or 4 years. Many people from San Francisco and Silicon Valley figured less expensive housing and longer commutes was very well worth the effort to relocate to smogland (the Valley). Over the last 4 years the real estate prices zoomed all over the place as long as it’s within a 2 or 3 hour drive one way (seriously!). Some of the new residents caught on and speculated. This drove up prices of real estate everywhere in the SJV. The 42 year old house I sold in 2000 for $79,000 is valued at $268,000 on zillow.com. Gang fights, drug deals, rap music, industrial area. Go figure. The thing that changed was the number of equity locusts relocating to Valley cities.
Valley minus the smog and farmworkers: pristine. Valley as it currently exists: hopeless cesspool, and a quick drive to the coast and the Sierras. LOL.
“I Want My Bubble Back!” from the Motley Fool:
http://www.fool.com/news/commentary/2006/commentary06060918.htm
Latest article from the Motley Fool. Choice tidbit:
“No, the real problem here is the uncritical press out there, which is all too happy to pepper every contrary indicator or bearish remark with an NAR official’s informed-sounding bubble denial. Never mind if what the NAR folks are saying doesnt seem to make sense (or contradicts what they said just a few months back). Hey, opposing viewpoints give the appearance of objectivity, and they’re an easy way of pretending to have looked for truth. It keeps your editor off your back, and if people out there get burned on account of your waffling reportage, no one can say they weren’t warned. Look, here’s the quote from the other guy!”
As Paul Krugman said “even-handedness is not the same as objectivity”.
I kinda liked:
“Price gains. Returns. These are people who want us all to believe in housing as an investment, and they just happen to take a cut on the deals. Of course, housing, over the long run, is not a good investment, except for a very savvy few. It’s a roof over your head that tends to keep pace with inflation, but not in a straight line. But if you can’t afford your place because you made a bad deal based on reports of the never-ending happy housing story, that cozy home could be a personal finance time-bomb waiting to explode.”
I have listend to and met Mark Schneipp (a good guy with a good sense of humor) and have my own theory on the motivations of economists: they have to make a living like everybody else.
Most of these guys earn part of their living giving speeches to business groups and you can bet that most business groups arn’t interested in hearing about bad news which has a chilling effect on business. This is particularly true in an industry like real estate. I think if you want unbiased analysis, it is ususally offered behind closed doors. Blogs like this are the wave of the future as far as dissemination of information goes.
I’ve been a long time lurker and very infrequent poster and I am actively engaged in the commercial side of the business in most of the severe bubble markets. I can state unequivocally that the information provided on this blog is high quality and very useful. I only wish I had shorted some of the hombuilders a year ago when everything that is now unfolding was predicted with perfect clarity on this blog. Thanks to all the folks who provide thoughtful and intelligent posts.
Nice post of your own.
Homeowners generally have ’sizable equity stakes to protect them from selling at a loss, even if they find themselves unable to make their mortgage payments,’ the report said
Not so. The gentleman who bought our old SoCal condo, the one we sold to become renters, put no money down. He’s screwed with even the smallest price drop, since he also has a reset in a few years, and he doesn’t have much promise for a gain in income.
But like his agent told him during the time of the sale, “If you don’t get in now, you’ll get locked out forever!”
What a joke.
Homeowners generally have ’sizable equity stakes to protect them from selling at a loss, even if they find themselves unable to make their mortgage payments,’ the report said
Hee hee! I’m on my third glass of wine (and last for the evening). But that line is a killer! Okay. I have sizable stakes in my AZ municipal bonds and my Series I savings bonds and mutual funds. But they are each a part of my portfolio. Oh I forgot my precious metals coins. I’m set for economic depression, stagflation and so forth. I would be far less secure if I had an ARM. Good gawd!
Fast forward three years, when their ARMs have readjusted and they can no longer afford their mortgages. With higher interest rates, tighter lending standards, and increased inventory, who exactly is going to pay 2004+ prices so that they can enjoy their ‘equity cushion?’
As I said on another thread, median SFR price in the San Fernando Valley rose 3.5% y/y for May. We should be flirting with y/y declines by late summer. Prices are absolutely flat since July ‘05.
“We know that happy endings don’t always happen”
What the hell is so happy about higher property taxes (in most places), housing that remains unaffordable for the vast majority of young people (as well as big chunk of current owners), and suicide loans that will inevitably make the FB fall into foreclosure & bankruptcy, etc. etc.???
You see, the happy ending - it is for THEM (real-estate-industrial complex). How else can poor Realtors afford all those BMWs and MBs and cruises without all the bidding wars and dummies buying sight unseen?
High property taxes are good, if you like bilingual education for children of illegals. Facetious, yes. So what you should do is wait for the 50% sale on California homes. $650,000 POS bungalows in 90277 zip code will go for $325,000 in a few years. At that point, have $400,000 in California municipal bonds, take out $65,000 for a down payment on a $325,000 900 square foot POS bungalow 1,000 yards from the ocean, and use the muni bond tax free interest to pay the property tax to the socialist Republic. Meantime, use legally available tax shelters to reduce your taxes further. Don’t ask me. Find them yourself. I think every one of us has some unique set of characteristics to be able to reduce taxes substantially without evading taxes. I do not condone tax evasion and I do heartily condone tax avoidance. If I announce my way of avoiding taxes and word gets around fast, my own tax break will go away. I have my favorite fishing hole and am fishing in it now!
Most of these economists can’t even run a hot dog stand profitably.
I would not be taking any advice from them. If they were so business smart, they would be rich and running their own business.
There is a lot less risk in holding down a tenure track professor position than in running a business. And as the professor asked the businessman, “If you are so rich, then how come you aren’t smart?”
Chesterton: “To be clever enough to get all that money, one must be stupid enough to want it.”
Yup, there are MANY more important things.
Nothing any of the bearish economists have cited (rising interest rates, increasingly unaffordable house prices, high use of risky loans) is new. The only change is in their outlook of the market’s future. This is prime evidence that the housing market is being driven by psychology, not fundamentals. Thus, neither falling interest rates nor rising wages would save the real estate market, if by some miracle either one would happen.
“Thus, neither falling interest rates nor rising wages would save the real estate market, if by some miracle either one would happen.”
I agree with that and I thiink many others do, too. The housing market is doomed. Since it’s going under anyway, Bernanke might as well throw it overboard as quickly as possible, to lighten the boat and try to keep dollar-buyers happy.
I think Bernanke has a much bigger problem thatn the housing bubble - namely the giant mountain of debt that is keeping the US Government afloat (at all levels). I agree, he needs to keep dollar holders and buyers happy, but nothing he has said recently leads me to believe that he is anything other than a soft-landing cassandra.
(Hope this isn’t a double post)
I think Bernanke has a much bigger problem thatn the housing bubble - namely the giant mountain of debt that is keeping the US Government afloat (at all levels). I agree, he needs to keep dollar holders and buyers happy, but nothing he has said recently leads me to believe that he is anything other than a soft-landing cassandra.
If Bernanke is going to bail out the dollar at the expense of the domestic economy there will be massive, and I mean MASSIVE protest from the American public. If we even start slipping into a recession that is close to the early eighties I don’t want to be standing within 100 feet of an elected official. In an “ownership society” based upon debt it is much better to be an owner with depreciating currency paying the bills than vice versa. In the opposite scenario default is the only way out, and default will be devestating to the American economic engine known as Joe Sixpack consumer.
If the Feds are willingly going to slaughter the average dumbass borrower, well then, they better be prepared for some serious blowback.
Volcker lived to tell about it, and I suspect that Bernanke will, too.
I’ll take the other side of that bet. You have way too much faith in Bernanke - he has not proven himself yet. Also, under Volcker this nation didn’t have the debt and demographic nightmare it does now. He’ll try and guide the american standard of living down gently like the past half decade where wage growth lags inflation, but I’m not convinced it will work without some bubble to produce jobs and give the illusion of prosperity. And as we both know, housing is toast.
Here’s where your argument doesn’t hold up. Joe Sixpack is too stupid to understand what’s happening around him until it’s too late. Kind of like the frog in boiling water.
Do you think the average “Joe sixpack” knows that the Fed controls the interest rate? If the borrower got into a stupid exotic loan, do you think they really understand how the American financial system works and who they should blame? All they will know is that they can’t afford they can’t afford their house anymore and have to sell.
Check this out:
http://money.cnn.edmunds.com/advice/specialreports/articles/115584/article.html
SUV owners so underwater they are stagin arson….
Substitute RE for SUV’s and you have got your news stories written for you in 2007 and 2008.
Brings to mind an old phrase I heard years ago… a “friction fire” occurs when the mortgage rubs against the insurance policy. hehe
Think we’ll be seeing more friction fires in the future?
I wonder if insurance policies have a ‘non-default’ clause.
As a former resident of Visalia (who luckily managed to sell my house in November of 2005), it is amazing to me how fast the San Joaquin Valley market has deteriorated.
Not that this couldn’t be expected…given the horrendous smog, huge numbers of illegal aliens, the everpresent smell of $hit in the air, “Valley fever,” low wage jobs, poorly educated workforce, etc., etc., etc.
But, mega developers like Centex and McMillin keep on building. I mean, really, 70 new developments in a city of 115,000??? You couldn’t drive more than a few blocks without seeing some independent builder or huge national builder performing their trade. Just about every month, back from 2002-2004, you would see the new construction sites advertising “new homes from the $120s” increase to “new homes from the $130s”, “new homes from the $140s” almost every month, until they got tired of changing the signs in the $200s.
My old house was 1800 square feet, 3BR/2.5Ba, built in 2002 for $160,000 and had all the amenities. It sold for $365,000 in November, but now I check the neighborhood and the identical floor plan (this is a tract home development) is now offered at $310,000, with homes languishing on the market.
Funny thing is: everybody thought Visalia was different (I know, isn’t that ridiculous?) and the good times would never end. I remember everyone from realtors to neighbors saying that home prices were still so cheap compared to the neighboring coastal areas, and the fact there is such huge (illegal) population growth, and that coastal businesses and newfound residents had discovered Visalia being a “gem” of the central Valley (hah!), that prices were absolutely justified at those high levels.
From the looks of it, the housing decline is far more noticeable in that part of the state than anywhere else in California.
Now for something a little different, my wife and I were just looking at homes in the Eureka area (no intention of buying for several years), and we found a nice 3000 square foot home that was constructed a lot like some goth castle–stone and architecture, that is oceanfront. It’s price: $1.3 mil. It’s price according to Zillow in 1997? $370,000. And yet, people are still enthusiastic about buying up along the north coast. Agh!
“But, mega developers like Centex and McMillin keep on building. I mean, really, 70 new developments in a city of 115,000??? ”
Too right.
Nobody stops to think of that when -
“Everyone wants to be in Visalia (or Bako or Fresno).”
“It’s our turn. We’ve finally been discovered and things are taking off!”
“Things are different around here.”
“We were undervalued for too long.”
People I know there honestly believe that good times are finally there to stay, this time. *sigh* Those squealing sounds? Ignore the investors being slaughtered and the flippers trying to race out en masse at full speed…
Yikes! I was born and raised in Fresno, got my Bachelor’s degree from Cal State Fresno, left town, got my MS from Cal State Chico, and never returned to the valley except to visit relatives. It’s a depressed area with seasonal farm labor causing constant double digit unemployment rates. Lots of foul air from being in a gigantic bowl and few days of air circulation, so auto exhaust and farm equipment and chemicals from the valley and crap blowing in from “clean” cities such as San Francisco make the valley very unhealthy.
Real estate there: normally depressed. In Fresno the norm is for blight to march northward toward the San Joaquin river. However that area (the bluffs) seems to be a great scenic location, so it’s kind of a barrier to barrios. Ha! The way the urban planning is in those cities is run by corrupt poli-developers, or developerticians, if you know what I mean. What a shame! At one time Fresno had an outdoor mall downtown and allowed panhandlers and druggies to destroy it. In the 1960s the Fresno Mall was marveled about in Life Magazine. Oh well. I guess the pollution from the growing central and northern California population is too intense for making anythink in the Valley an attraction anymore.
One of the common fallacies that will be the undoing of FB’s is:
I only plan on living here for 3, 5, 7 years. I will sell or refinance.
Who are you going to sell to?
Everyone has the same plan, and the exits will be jammed from here on out to 2008.
I can’t stand it. What does ‘FB’ stand for?
Thanks,
MjM
Fuc*ed buyer!
… or “borrower” — I believe this latter is the more common usage, at least on the bear housing blogs.
Check out http://www.housingbubblecasualty.com/ for a full explanation.
I would hear the ‘we’re selling within 5 yrs for big profit” crap. Yea, everyone wants to wake up to the smell of bullshit everyday. Just my dream. I love hearing about FBers in CA. Couldn’t happen to nicer folks. This thread makes my day.
Ben, you are da’ man. This blog is more educational than all of the books at you name it university, and all up to the moment current.
Not to mention tuition costs. This site is a gem.
So, I wanted to see if the Harvard Joint Center for Housing Studies might be influenced by the housing industry. In their website, there is no list of sponsors, but there is a Policy Advisory Board.
The mission statement included the following: “The Policy Advisory Board provides financial support and guidance to the Joint Center”
The Policy Advisory Board includes executives from the following companies:
Andersen Windows, Armstrong Holdings Inc., Beazer Homes USA, Black & Decker, Boral Industries, The Bozzuto Group, Bradco Supply Corporation, Builders FirstSource, Building Materials Holding Corporation, Canfor Corporation, Cendant Corporation, Centex Corporation, CertainTeed Corporation, Champion Enterprises, Countrywide Financial Corporation, Crosswinds Communities, Fannie Mae , Fannie Mae Foundation, Federal Home Loan Bank of Boston, Fortune Brands - Home and Hardware, Freddie Mac, GAF Materials Corporation, Georgia-Pacific Corporation , Hanley Wood, LLC, Hearthstone, Home Depot, HomeStore, Inc, Hovnanian Enterprises, Huttig Building Products, James Hardie Industries NV, Jeld-Wen, Johns Manville Corporation, KB Home, Kimball Hill Homes, Kohler Company, Lafarge North America, Lanoga Corporation , Lennar Corporation, Louisiana-Pacific Corporation, Marvin Windows and Doors, Masco Corporation, Masonite International Corporation, McGraw-Hill Construction, MI Windows and Doors, Inc., National Gypsum Company, Oldcastle Building Products Inc., Owens Corning, Pacific Coast Building Products, Pella Corporation, Pulte Homes, Reed Business Information, Rinker Materials, The Ryland Group, S&B Industrial Materials S.A., The Sherwin-Williams Company, Stock Building Supply, The Strober Organization, Temple-Inland, UBS Investment Bank, Weyerhaeuser, Whirlpool Corporation
No conflict og interest here
http://www.jchs.harvard.edu/people/pabmission.html
Thanks Backstage! (Your nick is appropriate here too)
Great job, Backstage, on finding the info to show that the JCHS is basically a propaganda machine for the builders, lenders, and suppliers. It is amazing to me that Harvard would put its prestige on the line with such fundamentally flawed research. (I know, they’re doing it for the money, but don’t they have enough money, and don’t they want to try to keep some prestige?) At least I can be a proud Alumnus of UCLA, since they’ve been calling this mess what it is - a bubble (even if they’ve had their timing off on when it would burst).
I’m no economist, but even I can see that what they’re saying is total BS. Are these economists saying the laws of supply and demand are irrelevant in determining the price of houses? The demand is shrinking, the supply is growing, and ARMs are going to reset, but don’t worry because even those debtors with resetting ARMs will be able to sell and keep their “equity.” Who are they going to sell to? Everyone is trying to sell, the speculators aren’t buying much anymore (OK, maybe they are still in a few areas, but they have left most of the previous bubble areas, such as California, Florida, Vegas, etc.), and a bunch of people looking at their loans resetting are suddenly going to be able to unload their homes without prices moving down? Please. And, for those who simply thought that they would re-finance, well it might be quite a bit tougher than they thought. If they bought in 2003 or 2004 with a 4% ARM, good luck with the ARM today at well over 5%. For those with I/Os, that over a 25% increase in payments - and these people were already stretched. Prices will fall, and they will fall hard, especially here in California. The mania here is done, and now it is just a matter of waiting for the pieces to fall where they may. But a “soft landing” is definitely not an option.
Backstage wrote:
‘The Policy Advisory Board includes executives from the following companies:
Andersen Windows,…”
Yee Ha! Everyone in for a stolen fast buck. Bunch of crooks. Love the post. I honor them all! burp. What an America. Greedy homebuyers, greedy homebuilders, greedy R.E. agents, greedy home construction materials companies. Greed, greed, greed. Feed yourselves now on your fat bellies! (Not you, the regulars on this blog who are laughing at the bubble).
So my question is, should we all buy the type of clothes where we have not only zippers on pockets (where we put our wallets), but buttons too and combination locks? Are we going to be fleeced to pay for the greedy mistake by the names in the post and the ones stuck with rapidly declining housing values?
Maybe I should get a residence and bank account in Costa Rica.
Posted this above, but also check out Nicolas Retsinas’s ‘Profile’: http://ksgfaculty.harvard.edu/nicolas_retsinas
His highest degree is an MA in City Planning.
But he has a very intelligent-sounding Greek name, so he must be a knowledgable expert on the housing market…
But he has a very intelligent-sounding Greek name, so he must be a knowledgable expert on the housing market…
Too funny!
Real case I posted that I saw last summer.
Family upgrades from an affordable house with manageable payment. New initial payment was about $2000 per month. Each adult earned about $13/hr. Calculated worst case scenario was $12,000 per month. Was neg am for 3 yrs. If they make it the next two years, I would offer about a 2% chance of them NOT being foreclosed on. THis was in the Bay area. I felt so bad for these folks, nice people. Just believed the CRAP they were told. Someone made $20,000 by putting them in this suicide loan.
New house $850K,
New mortgage, first $700K, second $150K
I actually got a degree in economics, so I don’t think its unreasonable that I use the title economist to describe myself.
The best work in economics is actually centered around psychology and is called “Behavioural Economics”. You see the way we teach economics is flawed because the assumption in economics is that people are rational decision makers. However most behavioural economist would tell you that they are not.
Personally I would probably stick to a modified form of rationality called conditional rationality. Yes people are rational but only within certain constraints. For example the crack addict is rationale in the sense that he or she is looking for the next hit and doesn’t want to go into withdrawl.
An economists would say that’s irrational I would say its within a crack addict is being rationale within the confines of their addiction.
People are like that too. Anyone who studies boom and busts cycles can tell you that rarely do you see a huge boom cycle without a bust. I guess its really a Newtonian idea. For every reaction there is an equal and opposite reaction. I guess cognitive psychologist would probably call it the unintended consequences of your the decisions you make.
This is where I think the Harvard study ,among many, probably has its downfall. Can people continue to carry current debt levels in the face of rising inflation for their basic neccities and stagnating incomes? I thinks improbable that people can leverage up so highly.
I think the Realtor.com figures say it all, rising inventories everywhere by comparison to year ago levels.
Also think of the situation from an intuitive perspective. Why should a speculator or investor by an asset that has a limited appreciation value (i.e. less than 10%) because of transaction costs.
You could probably get 4-5% on municipal bonds without paying taxes! Its an irrational use of capital.
The speculators are important because home prices are marginal in nature. In other words the value of the home on your neighborhood isn’t determined by what it sold for last year but by the price of latest home to be sold.
Also as more homes pile up eventually some owners will go into receivership and banks will be left an increasing inventory of homes. Having a non performing loan is a sure fire way to tie up capital and lose money. The loan holder at some point will need to sell (possibly at a loss) in order to get their capital back.
Of course when you throw in the behaviour aspects it gets really interesting. I.e. the herd mentality. All asset classes have manias and collapses its foolish to assume that homes are any different.
I feel that at some point when enough sales are done at a discount versus what the sellers want to sell them for. All the sellers on the market are going to realize its now or never.
Think of it as yelling “fire” in a crowded event with a small door. When too many people want to get in you have bidding wars when enough sellers want to get out your going to have a real economic calamity.
The fear is going to take on a frightening life of its own as home owners stretched to the limit try to get out NOW and lenders attempt to recoup whatever they can. The best example that I can think of would be Dallas Texas during the energy bust of the 1980’s I’ve been told that whole buildings were empty and that people simply vandalized empty homes. I’ve been told that some parts of the city look liked a DMZ. From what I understand this is already happening in Buffalo NY.
Why do I think its worse because people don’t make enough (at least on the coasts) to support these housing valuations. Someone who makes $50,000 can’t afford to maintain a home in San Fransisco or San Diego.
Of course when the home market goes the job market goes,at least in California. Because the mortgage, construction and retail sectors have been the main generators of job growth. At least according to Dick Thornberg in his video presentation to UCR.
I think the bears here have some vague idea of how awful this whole situation will become. Especially in view of the US’s energy and fiscal problems. But I think even they will be taken aback by the calamity that would insue in a housing collapse.
God help anyone who bought a home recently in California. Its difficult to imagine a group that will lose out more than the overleveraged home owner. Why is will this calamity be so immense.
I think of as potential energy, of the economic kind. The more money you pump into an economic system suddenly the more drastic the correction needs to be in order bring the system back to a stable value. We’ve had ALOT of money come in, in relative terms people owe more than they ever did during the last real estate collapse.
Lending standards in the last bubble were abysmal, in this bubble they’re even worse, due to various innovations in the financial markets. The average American is about to receive a high impact lession in the effect of hot money influx and withdrawl. People who don’t come here will be absolutely stunned by what will happen.
Yes, as much as the media has begun to catch on to this, there is still a huge number of people in SoCal (and specifically San Diego) who are absolutely clueless. Anecdotally speaking, I often read this blog as well as the piggington blog while I’m in a starbucks or Panera Bread. Quite often, I see people check out my laptop screen and read the articles and their titles. The look on their faces is always priceless. Like they’ve seen a ghost or something.
“I often read this blog as well as the piggington blog while I’m in a starbucks or Panera Bread. Quite often, I see people check out my laptop screen and read the articles and their titles. The look on their faces is always priceless. Like they’ve seen a ghost or something. ”
That is priceless, itself, JWM! Thanks for the post!